Foxes still guard financial henhouse

By ROBERT SCHEER

Monday

Nov 30, 2009 at 12:01 AMNov 30, 2009 at 1:00 PM

Jail, anyone? Perhaps that’s too harsh, and at any rate premature, but is anyone ever going to be held accountable for the behind-the-scenes sweetheart deals that passed tens of billions of taxpayer dollars through the AIG shell game to the very banks that caused the financial meltdown? Or for the many other acts of double-dealing that left one out of three American homeowners owing much more than their houses were worth while the folks who swindled them were rewarded with hundreds of billions in public money?

Undoubtedly not, since the same folks who are most culpable wrote the laws that made this and the other scams at the heart of the banking collapse perfectly legal. And guess what? They’re back at work in the government, writing the new laws that will, they claim, prevent us from being had once again.

As a telling example of that process at work, check the official response of the Department of the Treasury to the devastating report by the special inspector general for the Troubled Asset Relief Program, Neil Barofsky, titled “Factors Affecting Efforts to Limit Payments to AIG Counterparties.” The main factor was that Timothy Geithner followed the lead of Goldman Sachs CEO Lloyd “I’m Doing God’s Work” Blankfein in crowding the lifeboats with bankers.

Geithner, now treasury secretary, was previously the president of the Federal Reserve Bank of New York, where he negotiated the deal to pay Goldman Sachs and the other top banks in full to cover their bad bets on securitized mortgages.

Barofsky’s report concluded Geithner’s scheme represented a “backdoor bailout” for the financial hustlers at the center of the market fiasco. Noting Geithner denies that was his intention, the report says, “Irrespective of their stated intent, however, there is no question that the effect of FRBNY’s decisions — indeed, the very design of the federal assistance to AIG — was that tens of billions of dollars of government money was funneled inexorably and directly to AIG’s counterparties.”

Not surprisingly, the Treasury Department Geithner now heads defended his actions in not forcing “haircuts” on the full dollar-for-dollar payoff by AIG to the banks while he was at the New York Fed: “The government could not unilaterally impose haircuts on creditors, and it would not have been appropriate for the government to pressure counterparties to accept haircuts by threatening to retaliate in some way through its regulatory power.”

Nonsense, argues Eliot Spitzer, who as New York attorney general was way ahead of the curve in challenging Wall Street arrogance. Writing in Slate recently, Spitzer points out, “Pressuring Goldman and the other counterparties to offer concessions would have forced them to absorb the consequences of making suspect deals with an insurance company that was essentially a Ponzi scheme.”

The Ponzi scheme was based on the collateralized debt obligations, or CDOs, in which the bankers traded and which AIG had insured with the credit default swaps, or CDSs, they sold but failed to back with adequate funding. Now Geithner’s Treasury Department concedes AIG “should never have been allowed to escape tough, consolidated supervision.” But none of AIG’s scams was regulated, nor were any of the others at the center of the larger financial debacle, because of laws pushed through Congress by Geithner’s boss, Lawrence Summers, when they both were in the Clinton administration. Specifically, they prevented regulation of those opaque CDOs and CDSs that would come to derail the world’s economy.

As the inspector general’s report said, “In 2000, the” Clinton administration-backed “Commodity Futures Modernization Act ... barred the regulation of credit default swaps and other derivatives.” Why did the financial geniuses of the Clinton administration seek to prevent that obviously needed regulation? Because the Clintonistas believed the Wall Street guys knew what they were doing and that what was good for them was good for us lesser folk.

As Summers, who is the top economic adviser in the Obama White House, put it in congressional testimony back then, “The parties to these kinds of contracts are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies.”

Sounds nonsensical today: The inspector general’s report notes AIG, because of the deregulatory law Summers and Geithner pushed through, was “able to sell swaps on $72 billion worth of CDOs to counterparties without holding reserves that a regulated insurance company would be required to maintain.” But why, then, is Summers once again running the show with Geithner when both have made careers of exhibiting total contempt for the public interest? Because there is no accountability for the high rollers of finance, no matter who happens to be president.

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